BlackRock's quarterly profit jumps as investors pile into funds

By Ashley Lau

NEW YORK (Reuters) - BlackRock Inc (NYSE:BLK - News), the world's largest money manager, said on Thursday its first-quarter profit rose 20 percent, boosted by strong performance fees and strength in its retail business as investors poured money into long-term funds.

The New York-based asset manager, which now manages $4.4 trillion in assets, said it had positive flows across asset classes during the quarter.

"Even with all of the turmoil in the markets that we saw a few weeks ago, every day during that turmoil, we had net inflows," Chief Executive Officer Laurence Fink said in an interview on Thursday, referring to the company's retail client base. Fink noted most of that turmoil was due to "fast money" exits, with hedge funds moving out of their positions rather than any broad-based selling among long-term investors.

Revenue at BlackRock grew 9 percent to $2.67 billion, with revenue generated by fees based on a portfolio's performance surging 46.3 percent to $158 million from a year earlier.

Of the $26.7 billion that investors poured into long-term funds during the quarter, roughly half came from retail investors, who accounted for $14 billion of long-term net inflows during the quarter. Retail fund assets at the end of March totaled $508.7 billion, representing 12 percent of total assets under management at the end of March.

Still even as investors added more money than they withdrew across asset classes during the quarter, much of those positive flows in addition to retail were concentrated lower-fee institutional index mandates and iShares exchange-traded funds. Active equity and fixed income were a weaker spot, with institutional investors pulling $8 billion out of active equity and $7 billion out of active fixed-income during the quarter.

"It was certainly a fine quarter from an earnings standpoint, but these performance fees and expense items are certainly lumpy and some of them are one time in nature," said Edward Jones analyst Jim Shanahan, who also noted a concern about most of the growth delivered during the quarter being in lower-fee institutional index mandates rather than actively managed funds and other high-fee products.

Shares of BlackRock were down 1.7 percent at $304.96 in morning trading on the New York Stock Exchange.

FLOWS ACROSS ASSET CLASSES

BlackRock, because of its broad product offering that spans across asset classes and regions, has remained largely insulated from the market volatility experienced in early 2014, analysts say.

"It highlights the flexibility of their model and their ability to drive revenue from different sources of their business," said Gabelli & Co analyst Macrae Sykes.

Investors poured $15.6 billion into BlackRock's fixed-income funds and $3.8 billion into equity funds. They added $5 billion to multi-asset portfolios, while adding $2.3 billion to alternative funds.

With the bulk of long-term net inflows going into fixed-income during the quarter, Fink noted that much of the investor interest there has shifted toward "unconstrained" fixed-income products that are not targeted to any duration. A lot of those flows are driven by money moving into defined contribution and the de-risking of pension plans, he said.

"There's an ability (for BlackRock) to take share in fixed-income, given what we've seen on the competitive landscape with some of the bigger firms" in the industry, Sykes said.

INSTITUTIONAL ACTIVE LAGS

BlackRock has been working to strengthen its U.S. active equity business, which has lagged in recent quarters.

In all, institutional investors pulled $12.6 billion from active funds, with the bulk of those outflows coming from active equity and fixed-income. BlackRock has been working on bulking up its U.S. active equity business, but said "it will take time to build long-term track records."

The company last month named JPMorgan Chase & Co's (NYSE:JPM - News) Christopher Jones as chief investment officer (CIO) for stocks in the Americas to head BlackRock's Fundamental Active Equity team in the Americas. Jones, formerly CIO for JPMorgan Asset Management's growth and small-cap U.S. equity team, will also be the global co-head of fundamental equity, alongside Nigel Bolton, head of BlackRock's European equity team.

Analysts are looking for more growth in the company's actively managed and higher-fee products, rather than lower-fee index funds.

"Flows are certainly volatile, but this concentration of flows in institutional index funds is in my mind a negative development and continues this pressure on weighted average fee rates," Edward Jones' Shanahan said.

BUILDING BLACKROCK'S BENCH

BlackRock earlier this month announced a reorganization of its senior management ranks as it works towards an eventual succession plan for Fink, 61. The company said it would be shifting at least 10 senior executives into new or expanded roles in June as it seeks to groom its next generation of potential successors to Fink.

But Fink reiterated on Thursday that he has no plans to depart anytime soon.

"I'm not going anywhere," he said. "It was just a continuation of our building out our bench."

The idea of the reorganization is to allow senior managers to take on greater responsibility and gain a broader experience within different divisions of the company, he said.

BlackRock reported net income of $756 million, or $4.40 per share, up from $632 million, or $3.62 per share, a year earlier.

Excluding certain long-term compensation expenses and other one-time items, earnings were $4.43 a share. On that basis, they beat analysts' average forecast of $4.11 a share, according to Thomson Reuters I/B/E/S.

(Reporting by Ashley Lau in New York; Editing by Franklin Paul, James Dalgleish and Chris Reese)